Hiring Your Children in the Family Business: Rules, Records and Real Work

By MercConsulting · Published 2026-08-24 · Updated 2026-09-07

Paying your children for real work in the family business is legitimate when the job is genuine, the wage is what you would pay a stranger, and payroll and records are handled properly. How the rules differ by entity and what an audit looks for.

Hiring your children in the family business is a legitimate tax and family strategy when three things are true: the work is real and suited to the child's age, the pay is what you would give an unrelated person for the same job, and the child goes on payroll with the same paperwork as any other employee. Done that way, the wages are a deductible business expense, the income is taxed to the child rather than to you, and the child earns a work history and eligibility for a retirement account. Done casually, it is one of the easiest deductions for an examiner to unwind.

This article explains what counts as real work and reasonable pay, how payroll taxes differ between a parent-owned sole proprietorship or partnership and a corporation, the child's own tax picture, the records that hold up, the retirement-account opportunity, and the abuses that draw attention. The short answer is not the whole answer because the benefit depends on a specific set of rules, and the way your business is organized decides which of them apply.

"My daughter started running our social media at fifteen. We put her on payroll like anyone else, she logged her hours, and she got a W-2 at year-end. Treating her like a real employee turned out to be the whole point, for her as much as for the books."

What Counts as Real Work at a Reasonable Wage

Real work means tasks the business would otherwise pay someone to do: filing and scanning, cleaning the shop, answering phones, data entry, inventory counts, updating the website, managing social media, photography for marketing, or basic bookkeeping support from an older teenager. The task has to match the child's age and ability. A seven-year-old can shred documents and sort mail; a seven-year-old cannot reconcile a bank statement, and a wage that assumes otherwise will not survive a question.

Household chores are not business work, however the check is labeled, and neither is a payment for simply being available.

Reasonable pay is what you would pay an unrelated person for the same job in your market, which for most tasks a child can do is an entry-level hourly rate. Pay well above that is the first thing an examiner tests, because the excess looks like a gift routed through payroll. Write a short job description, set an hourly rate you can justify, and keep the hours realistic for a child who is also in school.

Hiring Your Children in the Family Business: How the Payroll Rules Differ by Entity

Federal payroll rules treat a child employee differently depending on who the employer is, and this is where the structure of your business matters most.

Income tax withholding applies in either case unless the child is entitled to claim exemption. In a corporation the wage is still deductible and the child's income tax treatment is the same; the difference is confined to payroll taxes. Some advisers respond with a separate parent-owned entity that employs the children and provides services to the corporation. That can be legitimate, but it adds an entity, a set of books and real substance requirements, and it is a decision for your CPA rather than a shortcut. If you are weighing an S corporation for other reasons, our article on when the election makes sense covers the trade-offs.

The Child's Side: Income Tax, the Standard Deduction and the Kiddie Tax

Wages are earned income to the child. A dependent child's standard deduction covers earned income up to the regular single-filer amount, which is indexed each year, so wages below that level may produce little or no federal income tax; verify the current figure with your CPA rather than assuming. Withholding still applies unless the child is entitled to claim exemption on Form W-4, which requires no tax liability last year and none expected this year.

The so-called kiddie tax applies to a child's unearned income, such as interest and dividends, not to wages. A working child usually remains your dependent, provided the child does not supply more than half of his or her own support, and Texas has no personal income tax, so there is no state return on the child's side.

Records That Hold Up

The file that protects the deduction is the same file any employer keeps. Build it from the first day.

Keep the work product as well: the posts, photographs, scanned files or inventory sheets the child produced. Child-labor law is the other half of compliance. Federal law broadly exempts children working for a business wholly owned by their parents from most age and hour rules, outside hazardous occupations, while Texas applies its own limits on hours and hazardous work for minors. Check both before you set a schedule.

Turning Wages Into a Head Start: A Retirement Account for a Working Child

Earned income is the ticket to a Roth IRA. A child with a W-2 can contribute up to the lesser of that year's earned income or the annual limit, which is indexed. The contribution does not have to come from the child's paycheck; a parent or grandparent can gift the money as long as the child had at least that much earned income, and the account is opened as a custodial Roth until the child reaches majority. Decades of time in the account is the asset, and no one should promise what it will grow to.

An older child who meets your company retirement plan's eligibility rules may also be able to participate, which depends on the plan document. Coordinate this with the adviser who handles your own retirement plan strategy, keep the W-2 with the account records as proof of eligibility, and check current financial-aid rules before building a large balance in the child's name, since a child's assets are assessed differently from a parent's.

If you would like to think through family compensation, and your own, with someone who has set this up many times, the free 30-minute discovery call is a working session rather than a pitch.

The Abuses That Draw an Examiner's Attention

The same handful of mistakes account for most of the deductions that get reversed.

• Paying for chores, or for existing. Mowing the family lawn is not work for the business.
• Wages out of proportion to the work. A rate that no stranger would be offered for the same task.
• Lump sums in December. A single year-end payment with no timesheets behind it.
• No payroll at all. Deducting wages that were never run through payroll or reported on a W-2.
• Contractor treatment. A 1099 issued to a minor working under your direction, on your schedule, with your equipment.
• Money that circles back. Wages deposited to the child and then used to pay the parents' mortgage or groceries.
• A very young child in a role that needs an adult. Modeling and marketing uses are the usual example; they must be real and priced as a stranger would be.

The wages become the child's property. A parent serving as custodian of the account has duties to the child, and how those funds fit your family's wider plans belongs in estate planning for business owners.

Where MercConsulting Fits

MercConsulting is a boutique business consulting firm in Houston, Texas, organized around five outcomes, and family compensation belongs under Minimize Taxation. We treat what the owner and the family take out of the business as one system: salary, distributions, retirement plans, reimbursements and, where the work is real, wages to children. We help you define the roles, set up the payroll and record-keeping routine so the file builds itself, and coordinate with your CPA and payroll provider, who decide the tax treatment for your entity. Most of what we recommend we can also build, including the time-tracking and document systems that make this hold up. It sits alongside the everyday deductions many owners overlook, and it should never be the only reason for a hiring decision.

We are not a CPA firm or a law firm and we do not give tax advice. The thresholds and limits above are indexed and change; your licensed tax professional should confirm how they apply to your business and your children.

Frequently Asked Questions

How old does my child have to be to work in my family business?

There is no federal minimum age for a child working in a business wholly owned by the parents, outside hazardous occupations, and Texas applies its own hour and hazardous-work limits for minors. The practical floor is the age at which the child can perform a genuine task you can document. Very young children in roles that require adult judgment invite scrutiny, so match the job to the child and verify current state rules.

Do I have to pay Social Security and Medicare taxes on my child's wages?

It depends on the employer. In a sole proprietorship, or a partnership in which every partner is the child's parent, wages to a child under eighteen are exempt from Social Security and Medicare taxes, and wages to a child under twenty-one are exempt from federal unemployment tax. In a corporation, including an S corporation, those taxes apply at any age. Income tax withholding applies in either case unless the child properly claims exemption.

Can I pay my child as a 1099 contractor instead of putting them on payroll?

Generally no. A child doing tasks under your direction, on your schedule, with your equipment is an employee, and contractor treatment invites a misclassification problem. It also forfeits the family payroll-tax exemptions that exist only for wages paid by a parent-owned sole proprietorship or partnership. Run the child through payroll, withhold as the entity requires, and issue a W-2.

Does my child have to file a tax return for wages from the family business?

A child must file if wages exceed the filing threshold, which is tied to the standard deduction and changes each year. Below that level filing is optional, but it is usually worth doing to recover any withholding and to create a record of earned income that supports a retirement-account contribution. Check the current threshold with your CPA and keep the W-2 either way.

Can my child contribute to a Roth IRA with wages from my business?

Yes. Earned income makes the child eligible to contribute up to the lesser of that year's wages or the annual limit, which is indexed. The money can come from a parent as a gift as long as the child's earned income covers the contribution, and the account is held as a custodial Roth until the child reaches the age of majority. Keep the W-2 as proof of eligibility.

This article is for educational purposes only and is not legal, tax, or investment advice. Consult qualified professionals about your specific situation.